Alliant Energy Corp (LNT) 2002 Q2 法說會逐字稿

Thank you for holding, ladies and gentlemen, and welcome to the Alliant Energy second quarter earnings conference call. At this time all lines are in a listen only mode. There will be an opportunity to ask questions at the end of today's conference. Instructions for asking questions will be given at a later time.

I thank you for your attention, and now turn the time over to your host, Mr. Eric Mott.

Go ahead, please.

Good morning, and welcome to Alliant Energy Corporation second quarter earnings conference call. I'm Eric Mott, assistant treasurer at Alliant Energy, and with me today is Erroll Davis, the chairman, president and chief executive officer, Tom Walker, executive vice president and chief financial officer, Tom Hanson, treasurer, and John Kratchmer, corporate controller.

Earlier this morning we issued a press release reporting Alliant energy's second quarter 2002 results. If you haven't seen the release, it's available on our web site at www.alliantenergy.com in the news section.

The format for today's call will be as follows. Erroll Davis and then Tom Walker will make some brief prepared remarks regarding the second quarter results and the outlook for both 2002 and 2003. This will be followed by a question and answer session for questions from investment analysts and institutional investors. But before we begin, I would like to remind you that the remarks we make on this call, including our answers to your questions, include forward looking statements. These forward looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters discussed in Alliant Energy's press release issued this morning and in Alliant Energy's filings with the Securities and Exchange Commission. Alliant Energy disclaims any obligation to update these forward looking statements.

With that being said, I'd now like to turn the call over to Erroll Davis.

Thank you very much, Eric. It's always good to follow the legal caveat.

Let me first again welcome everyone to our call this morning. As you are all aware these are very dynamic times that we're living in, but fortunately since our last call last week there hasn't been any anything that really has changed. Our expectations for our earnings in 2002 or our guidance in 2003. And so I don't believe anything that we will share with you this morning will fall under the rubric of surprises. Our second quarter earnings or release we just sent out were 6 cents per share which was at the top of the 2 cent to 6 sent range that we share with you last week. And again, our guidance for 2002 remains in the range of a dollar 35 to a dollar 55. And Tom is going to be providing more detail on the numbers later in the call.

Another positive I do want to stress is since not much has changed, our comments are going to be a bit more brief than they were last week. But as I suggested last week, the first half of 2002 has been a difficult one for Alliant Energy, as we are also finding out it's been difficult for a lot in the industry. We expect improvement in the second half and we'll be happy to talk about the reasons for that. But again, what we've experienced in the first half, it's clear to us that in spite of improvements in the second half, our performance is not going to build on the rather positive performance we've had for the last three years and expect to, again, pick up in 2003.

If you look at the year to date numbers for the utility, you'll see that net income is down slightly this year compared to last year, and I also want to stress if you have been following that, again, we are in a four- year rate freeze in our utility in 2001 was down from the year 2000, which again emphasizes or makes it clear why we're putting a great focus on getting rate actions. Our nonrate weighted earnings were off significantly in the first quarter. We - in the first half of this year we had detailed those to you. Again, they made significant contributions in 2000 and 2001 and we do not expect them to be a significant factor positively or negatively in our overall results for 2002.

We report on a consolidated basis, of course, but we certainly do not operate the company that way. Our domestic utility businesses are kept completely separate from our nonregulated business. This is not only in compliance with law, but it also makes good business and operational sense for us. We are very clear that we do not want to subject our regulated customers either to the risk or has been the case over the last several years the gains of our nonregulated businesses.

Going forward, however, there are a number of factors that we believe are going to contribute to our results, both this year, the second half of this year, as well as next, and I want to point two out, and then as we move into the other parts of the presentations and then your questions and answers, we certainly can expand on these or any other factors that you believe are relevant.

The first, again, is rate relief. We, again, have to receive both adequate and timely rate relief in our domestic utility service territories and our pending cases in both Iowa and Wisconsin. Our core utility businesses remain strong. They're profitable. They're operationally sound. They're clearly the foundation upon which our company is built. So, appropriate levels of relief are essential to maintaining financial health of our utility operations as we go forward.

We have stated in numerous form that we believe we operate in relatively supportive regulatory climates. We certainly have not changed those views. Supportive does not mean these are easy jurisdictions. Our regulators are tough, but on balance. We believe we have received fair treatment over time and therefore I'm confident that we will continue to receive appropriate treatment and appropriate relief, both in 2002 as well as 2003.

Second scenario that we're going to focus on in improving is our nonregulated businesses [Second area] and Brazil in particular. All have operated in extremely tough environments, environments, however, which are no different than any other nonregulated businesses are operating in. We do have operational plans to improve those businesses. We simply have to execute successfully on that. As I mentioned last week, we are limiting our investments in a number of areas, particularly in Brazil, until the financial performance from those investments improves. We simply have to have the appropriate returns for the amount of capital deployed in those businesses.

So, again, we are committed to our strategies. We believe that our strategies remain sound. It is strategy, good strategy, that takes you through times like this. As we suggested, our tactics near term will be to narrow our strategic focus over the next several months and years. You saw that with the announcement of the selling of our Cargill Alliant joint venture which again had been a very profitable business for us. But we did not see an appropriate risk return in the long run for that.

Lastly, as I did last week, I'm going to close my comments with a discussion of our dividend. We remain committed to the dividend policy we have set in place. We have no current plans to change that policy. And while few have questioned our commitment, I noted a few comments about whether we would be able to maintain it. We believe that we continue to generate the necessary cash flows that provide us the financial flexibility to pay our current dividend, in spite of 2002 earnings challenges and the problem certainly should be lesser as we move into 2003.

So, again, we believe our dividends are safe. Our cash flows are strong, and we're committed to maintaining our dividend. It is a key and integral part of our strategic plan.

Let me turn it over right now to our chief financial officer, Tom Walker, who is going to discuss in a bit more detail our second quarter results. And again, I look forward to your questions after Tom has completed his discussion of these numbers.

Thanks very much, Erroll.

As Erroll indicated, the earnings in the quarter were 6 cents a share. That compares to 32 cents in the same period last year. On a gap basis the earnings were 7 cents this year in the quarter and 48 cents last year. Impacting that were lower oil and gas prices, lower results from international operations, increased utility operating expenses, and the continued sluggish economy.

As mentioned in our release, we also incurred the one-time charge. This charge was about 8 cents in the second quarter. These factors were offset somewhat by more favorable weather conditions in our domestic utility service territories, the implementation of 49 million of retail and $6 million of wholesale internal rate increases in Wisconsin. And we also had a lower effective income tax rate. In the utility, the income was up in the effective quarter compared to last year. Both electric and gas margins were up, but so were operating expenses. The effects of the economy continue to impact the utility as well. Industrial electric sales for instance were off 2 percent in the quarter compared to last year. We do currently have as we've mentioned 252 million in pending rate increases. We have received about 70 million in interim rate relief subject to refund thus far. In Wisconsin we have requested interim relief of about 63 million in December of last year and received 49 million this last April.

Our $6 million wholesale electric rate increase in Wisconsin also went into effect in April.

In Iowa we requested about 22 million of interim relief in our electric case and that was filed in March of 2002, and we received last month about $15 million of interim rate relief.

In summary, we have received some relief, though not the entire amounts that we have requested. And the net take away on the regulatory front is that we have made some progress, but we do have a way to go here. In the nonregulated businesses in the second quarter, results were quite frankly disappointing. Lower oil and gas prices, lower than anticipated electric sales in Brazil, and an asset valuation charge all contributed to lower results compared to the second quarter of 2001. In our investments business units results for the second quarter of 2002 actually improved over the first quarter. This is largely driven by our whiting petroleum and gas business unit. We expect performance to improve going forward in the year. We've invested approximately 110 million in oil fields and gas reserves. This year, year to date, we expect that will push earnings in the second half. We're also hedging about 50 percent of our volumes in this business, so we're attempting to lock in prices as we go forward. This business was significantly impacted in the first half due to prices. To some extent in the quarter a little bit of impact from production.

Integrated services business unit performance was negatively impacted by write^offs in the first half of 2002. That's virtually all the losses that you see except for a couple cents a share. But going forward we expect not to have those write-offs impacting that business. The results in our international business unit were driven primarily by Brazil. There was a 3 sent charge in the quarter in Brazil for an adjustment on a regulatory asset. But more^over, slower than anticipated sales recovery along with the continued depressed wholesale market are among the factors that negatively impact our results in Brazil. We do believe that sales will substantially recover to prerationing levels by the end of this year in Brazil, and that regulatory reforms will begin to help improve results in the last half of 2002 and then carry over into the future, in 2003.

So, overall, we believe that there are many positive factors that should result in improved performance in the second half of 2002. We conclude a recovery of electric sales substantially to the prerationing levels in Brazil, a general domestic economic recovery. Stable prices and increased volumes in our oil and gas business, additional rate relief and a continued trend to more typical weather. However, we don't think these factors will be adequate to offset the less than anticipated results from the first half. And so as we discussed earlier last week, and then again today and in our release, our expectation this year is earnings of $1.35 to $1.55 on an adjusted basis, and for next year $2.40 to $2.60.

For 2002 we expect our regulated domestic utility to provide the vast majority of these earning. We expect whiting will be profitable and contribute earnings in the range of what it contributed in the prior years. And essentially offset the net results from our other nonregulated businesses. Whiting will not be the only nonregulated business, however, that will be profitable. Within our nonregulated portfolio we'll have many businesses that are profitable, but these will not be enough to generate a significant overall profit this year.

We do expect our nonregulated operations to have a significant positive - neither a significant positive nor negative impact on our earnings this year. In summary, I really can't say much about the stock market. We've all seen a pretty chaotic stock market in effect, even more chaotic for utilities. But we do believe in the management team. We have a sound strategy, and based on the execution of that strategy we will rebound in our earnings in the second half of this year and then going forward in 2003.

Thank you.

Thanks, Tom. We'd now like to open up the call to questions from investment analysts and institutional investors. We ask that you limit yourself and your questions and to be respectful to the time that others may have who are waiting in the queue to ask questions.

At this time I'd like to turn the call over to the Operator who will provide the directions on how to ask questions. 00:32:40

Thank you. To ask a question please press the 1 followed by a 4 on your touch phone phone. If for any reason you need to retract your question, please press a 1 follow by a 3. All questions will be taken in the order they are received.

[Pause.]

Your first question comes from Mr. Todd Haughtman [phonetic] from Bank of America. Go ahead, please.

Actually, this is Theresa Hogue with Bank of America. I have a question that you may already have answered, too. I apologize I came into this call pretty late. As far as the forthcoming rate considerations, as I look at the environment in Iowa and Wisconsin receiving interim rate relief, it seems like I think this may be the first time you're receiving interim rate relief and not the actual orders right away. And I'm just wondering if you could just sort of go and discuss the regulatory environment and a bit further other than the timing and, you know, how the commissions are receiving your request, especially in Iowa.

Well, let me - this is Erroll, Theresa. I appreciate the question. First, let me emphasize the point I did make during the - my comments and if you came in late, you probably did not hear it. and that is that we continue to believe that we do business in supportive regulatory jurisdictions, supportive of course does not translate into meaning easy, but probably firm but fair is a more adequate - more appropriate description of it.

You are correct that this is the first time in my 24 years that I remember getting interim rate relief in Wisconsin, and we view that as a most definite positive. If you remember that we filed a case in August of last year and asked for $8 5 million and we got 49 million in April of this year. the other reality is that we have not received a final order yet. Part of the problem there is the sheer number of rate actions that are going on at the commission as well as some very significant transmission cases that are going on there. So it's not really a function of our case, because it was completed and the testimony was done and filed and hearings have been completed for four or five weeks now. And so - I'm sorry, four or five months. and so it's just a matter of where you are in the queue. We expect to get a final order in August on that.

Iowa has a statutory limit in terms of a rate case, I believe it is a year, 10 months. So we did file a electric case in Iowa in March. It's historical gesture asking for 82 million. We did get an interim right away of 15 million, and so the latest that the order would be would be ten months from the filing there. Now, we made a subsequent filing in Wisconsin, and that's because, again, they have a required two- year - every other year filing schedule, and so we filed again. We've essentially pan caked a case in order to get back on to that two- year schedule. In that case we filed in May of this year for an additional 59 million. And if that stays on schedule, then we should receive an order in January of '03 there. So other than that, we also filed a gas case in Iowa in July or this month, and again, that has a ten-month statutory time frame, and that was for $20 million. And we expect, since there are fewer items under contention there, we should get an interim very close to the full amount, probably in the 17, 18, $19 million range in October of this year. And so that pretty much sums up where we are. I believe in the previous release we did file or did publish, I think, a list of the pending rate actions. So I hope that's responsive to your question.

And yes. And, actually, if I could just follow-up with one or two more. The 20 million that you filed in Iowa, is that also under that statutory timing -

Yes. That's a gas case versus the electric case. In Wisconsin they're filed together, so we filed an electric case in March we filed a gas case in July. And so they'll all be subject to the statutory frameworks.

And in Wisconsin where you don't have that statutory framework and you said that you were expecting a final order by the fall for the 85 million, is that at risk for further extension?

We don't think so. As I said, there's no more procedures to follow or be put in place, no more hurdles or anything like that. All we need is a discussion at the commission and then a writing of the final order. And I believe they scheduled that for the first week in August, to put that on the calendar.

Okay. Thank you very much.

Okay.

Thank you. Once again, if you'd like to ask a question, please press a 1 followed by a 4.

Your next question comes from Mr. Mike Garvey with Angelo Gordon. Go ahead, please.

Good morning. A couple of questions. On the E and P side, you commented that you'd like to hedge 50 percent of your volume going forward. Where do you stand towards that objective for the balance of this year and next year, and could you give us any guidance on the price levels?

This is Tom. We have a policy of looking prospectively about a year and trying to hedge production that we know that we're going to produce. We don't want to put ourselves in a position where we've hedged and then we wind up not producing and we have to satisfy a hedge. So what we do is we've set an objective at around 50 percent, and that varies from quarter to quarter. Right now we're at about that level for the rest of this year. We're not up to that level for 2003, but we're monitoring that. And we don't disclose exactly the price that we hedge at, but you can expect that we're very attentive to the forward strip and we take opportunities as they present themselves.

Then, also, you commented, Erroll, on a narrower strategic focus. Can you give a little more detail on what that would mean? Does that mean less international, less nonregulated, a little more clarification there, please?

Certainly. I appreciate the opportunity to do that. We have been developing about 13 separate platforms as we move forward. We have now concluded, as we have shared with you, that our primary drivers as we move into the future are going to be international, our core utility, and a domestic nonregulated utility business which you saw the start of last week or the week before with the purchase of a facility from Marant [phonetic] on a toll basis. So you will again, we still have other platforms that we'll start to shed. For example, we have shed our trading business. In the short term we are making sure from an international perspective that we can earn the appropriate returns in the markets that we're in. So we have slowed the expansion and some we've stopped it in. In Brazil. We will continue in China for example, so we certainly, at this point, are not backing away from our international strategy. But again, we also have suggested that we were increasing Cargill alliance - excuse me, whiting had a rather rapid rate so that we could dispose of that. Once it reached a point where it could - we could achieve maximum value in the marketplace, and we think that would happen when it reaches the size where it can be a stand alone business and we're projecting that to be in the 2004, 2005 time frame. And I believe we have stated publicly we think we'll be able to harvest that for hopefully in excess of a billion dollars at that point in time. And so again, we will narrow the platforms [Paragraph], but we view our cost drivers as primary cost drivers as the core utility, international and domestic generation. One.

One of the strengths I believe we continue to have is we have not been forced into any fire sales of assets and so we will harvest all of these assets, shrink all these platform at a pace which gives maximum value for our share owners. So, again, unlike some others, we're not in a position where we're just having to dump businesses.

And related to Brazil, given it's under earning in the past year, at what point do you decide that it's probably not going to generate enough returns? Do you have a time line there? If it doesn't turn^around by a certain point?

We certainly don't have a fixed time line, but let me suggest also that we appreciate that we have capital there and we want an appropriate return on that capital. But we also continue to believe that there are rather good explanations for the performance in Brazil. When you're making an investment, you don't anticipate a 70- year drought, for example, nor a 20 percent reduction in usage. That usage is starting to come back. The returns are starting to come back. One of the reasons why we invested in Brazil is because of the rule of law, the enforceability of contracts, versus some other places. But that's also the very reason why progress is slow versus instant. You can get instant changes in totalitarian regimes, you have to follow democratic processes as they are doing in Brazil today. There are a series of regulatory reforms which should be completed later this year which certainly should give more stability to the marketplace, more transparency, more stable wholesale markets are operational improvements, and we're also - continuing. We're also pursuing restructuring of our financings here to make sure that we can lower the cost of capital there.

This is an election year. Progress is a little slow there. We have stated categorically we're not going to put any more there, but we also don't believe that there are many marketplaces in this world that are growing where energy usage will grow at 4 to 8 percent where you have stable democracy and enforceability of contracts. And so we are not pulling the plug on Brazil. We are taking a wait and see attitude. We believe things are trending positively in Brazil. Certainly when you have a 20 percent reduction in usage due to rationing and you take that rationing off the 20 percent does not reappear over night. So we do not expect to have robust results with 20 percent less revenues. I mean, if you think what that would do to our domestic situation, for example. and so while we are not saying everything is, in fact, rosy there, we are taking steps to maximize the return on our investment. But at this point we are not contemplating pulling the plug. But I do caution that our patience is not endless.

And one final question. Given the tight credit markets here, do you have any facilities coming due or any - could you just update us on any maturities coming due on any facilities or bonds where your plants are?

There are none that are imminent, none of our long term financing. We do have short term financing rollover on a yearly basis. Those naturally will rollover. the longer term financings, though, there's nothing that's imminent.

Your facilities, you don't have any bank facilities coming due that have to be reupped?

Yes, we have short term borrowings in the bank facilities in the normal course every year we reup.

Do you have any time on that?

It's in the second half of the year.

The second half. Thank you very much.

Actually it's in the fourth quarter time fray. Frame.

Fourth quarter. Okay. Thank you very much.

Your next question comes from Ms. Danielle Sykes from Salomon Smith Barney. Go ahead, please.

Hi. I was interested in knowing just to get a sense of distribution of earnings. A normal, if you will, earning, a full return on the utility side, the contribution to earnings will be in the neighborhood of $2.30, $2.50, or is it really at the high end of the range and actually you are earning a good return originally?

Danielle, this is Erroll. That is at the very high end of the range. Our sense is that our utilities have been earning a little bit of both of $2, and that has been declining a bit. In 22000 they are $2.12 and in '01 it was $2.05. Again as I say we have $250 million in rate actions out, although again there are costs, minor costs -

I was wondering there must be some minuses, right? You cannot just assume that 70 million is automatically going to give you another 50 cents.

No, I can't do that.

That's what I was wondering. That must be upsetting.

Let me say that we have projected the 240 to 260 for next year, and we've also suggested that we expect our non-reg to continue to grow and that we have projected that it would be about 25 percent in the 25 percent range in there. And so I think you can do the math from there.

Uh-huh, right. Am I assuming that 2001 was a very good year on the nonregulated side and this year is an unusually bad year? I'm just trying to see where I can use the base of zero.

Our non-reg earnings contributed 10 percent in the year 2000 and 15 percent of our earnings in 2200, 2001, I believe it was 36.

Right, 36 cents and 21 cents in 2000. And that - but you mentioned earlier on in your speech actually it was [inaudible], I guess, because whiting petroleum [inaudible].

Whiting petroleum is driven by gas prices and receive the impacts of that volatility. But I do want to stress that at the same time our investments in other businesses are starting to kick in as well. We expect this year, for example, to be profitable in three out of the four international marketplaces that we're in, and so again, in the early stages, you are perhaps correct that it was all dependent on whiting. As we move forward our dependency on whiting should decline, which is one reason that we are planning on harvesting that. for example, we just purchased a nonregulated facility which is completely told, and so next year you'll start to see some earnings from that as well as any other subsequent facilities in the upcoming years.

So this would be more diversified? You anticipate that it would be more diversified into - I mean I guess domestic type of energy facilities?

Let me say one thing, Danially. and that is in these days of not wanting to surprise anyone, let me say that our 240 to 260 range from our perspective is one that we're comfortable in achieving absent some catastrophic changes and, in fact, many of us here consider that to be on the conservative side. and so, again, we'll have to see what kicks in from the rate increases, and I appreciate the math that you're trying to do right now. But our view from an investor relations perspective at this point is that we better come out with ranges in these marketplaces that we're rather confident that we can achieve. And so that's why we came out with the 240 to 260 range, and it would be our ambition to exceed those ranges.

Thanks a lot.

Thank you. This will be the last question from investment analyst and institutional investors and it comes from Mr. Todd how do you spell man with bank much America. Go ahead, please.

Hi, this is Theresa again. I just had some separate questions to follow-up. In terms of Brazil, just following up on what you were saying, have you I guess considered taking some sort of write down there in order to be conservative, or taking a reserve there? And then second, in terms of the dividend, there's been much talk about the dividend being at risk. And I was wondering if you could sort of give us sort of a background in terms of times in which you have not been able to earn the dividend but have still paid it.

Theresa, this is Tom. Thanks for that question, for both of those questions. Let me take them in sequence.

Our Brazilian operations are depressed now because of current situations. Our view is that the drought, the regulatory environment, many of these things have impacted the business on the short run will be resolved and we will be able to see the benefits of what we really quite frankly anticipated when we made our original investment. We, as most companies do, look at all of our assets we have on our balance sheet on a recurring basis and assess whether those assets are appropriately valued on our balance sheet and I can tell you that we do that in Brazil as well. and that process gives no rise to any need to adjust the value of the asset on the books.

We also look at our investments and share with our board on an ongoing basis the performance of our investments that they have approved. and we've just gone through our planning conference where we've reviewed all those again. And very critically analyzed the determinate to get us to our expectation of performance in the future, and we're confident at this time that the values that we have recorded for Brazil are appropriate. And the circumstances that we find ourselves in on the short run do not cause us to believe that we should be writing off any of the Brazilian assets.

With regard to the dividend and the cash flows, as we have pointed out, had a history I think of 200 something, I think 26 or 28 quarters now we are where we paid this did I have den. We set a strategy early when we merged the three companies to freeze the dividends fundamentally and grow out of our dividend pay out ratio. Now, we've had some aberrations along the way. This is one year in our view that's an aberration, but we also had an aberration in 1998 when we generated a dollar 26, but still paid a $2 dividend. We watch our cash flows very carefully. We do understand that our operational cash flows will be impacted this year with regard to the earnings. However, we've done a lot of tax planning and other things and we feel very confident that our operational cash flows will include everything will be substantially what they've been in the past.

So, we think we have strong cash flows. We certainly go to the markets as we need to for our capital spending as we're going to to in the future. Although the markets are very crazy right now, we have to be cautious there. But we have discretion on what we spend in capital going forward.

How much discretion would you say is there in the budget that you've outlined?

Well, we have spent, I think last time last week we put in our relief in expectation of a billion spends this year, and 1.2 billion next year. We spent a little under half of that so far this year. Whiting alone generates in the range of a little under 100 million in positive cash flow on a yearly basis. If we stop reinvesting that in the business, that goes a long way to supporting the dividend. And we haven't even talked about the utility which virtually pays the dividend when we get back to the earnings levels that we've had in the past. And we expect to do that. As Erroll indicated going forward, the earnings levels we've had in the past is what we would expect to be getting to in the utility. So we're pretty comfortable with regard to the dividend. On the short run, and certainly the return and the buoyancy and the performance of the business longer term as well.

And just finally, you mentioned that whiting should take care of its own. What about the international businesses; are you expecting the cash flows there to take care of the capital spending needs?

Yes. Well, we have said that we're not going to invest capital in Brazil.

Yes, that's right.

In China we're at a level now, and we have strategically communicated this in the past, strategically we wanted to get to the level where the dividends from the Chinese operations pretty much pay for any future investment, and that's where we are [Strategically] with regards to China.

Australia and New Zealand are less significant businesses for us and don't require a lot of capital going forward. Domestically where we really are focused in the near term is in the whiting business in our unregulated businesses. and, of course, we always spend the appropriate amount of capital in the utilities to provide reliable service.

Thank you very much.

Thank you.

Since there are no more questions from the investment community, I would like to take this time on behalf of Alliant Energy to thank you all for your participation on the call this morning and for your continued support of Alliant Energy. A replay of this call will be available through August 2nd, 2002 by dialing 800-839-0860 and entering the pass code of 1111, or by accessing a webcast version of this call on our company's web site at www.alliantenergy.com, back slash, investors. Thank you.

Thank you. This concludes today's conference. Thank you for your participation.

01:00:16 >>UNKNOWN SPEAKER: Thank you.